Canada's 2008 Radio Spectrum Auction Design Flawed, According to NERA Economic Consulting Report

16 July 2009

16 July/New York -- The advanced wireless services (AWS) spectrum auction completed by Industry Canada in July 2008 may have been distorted by the insertion of incompatible regulatory goals into the auction process, according to a report by NERA Economic Consulting, a leading global provider of economic advice and analysis in business, legal, and regulatory matters. The report was authored by NERA Vice President Christian Dippon for the Canadian telecommunications company TELUS, and was submitted to Canadian regulators this month.

NERA's analyses determined that overall revenue from the auction exceeded the average predicted value by 138 percent. The report found that the most important reason for this was arbitrage opportunities in the auction design generated by the regulator's decision to set aside 44 percent of the available spectrum for "entrants" which, as defined, were all qualified bidders except the three largest incumbent mobile operators.

"In the Canadian case, the set-asides both reduced the supply of spectrum available to existing market participants and artificially increased demand by allowing new market entrants to bid on spectrum with no intention of buying," said Mr. Dippon. "The resulting inflation of spectrum prices paid at the auction might have been beneficial for Canadian government revenues, but it hurt the goal of stimulating competition by potentially delaying service roll out, increasing retail prices, and resulting in market consolidation and possibly market exit."

The report concludes that to avoid these problems in future auctions, regulators need to carefully balance the costs and benefits of regulatory intervention. Most importantly, the report recommends that they should try to minimize the side effects of any regulatory intervention. If they believe that market forces are not working properly, however, and regulatory intervention through preferential treatment of some bidders is necessary, the report recommends that they should take steps to limit benefits to actual market entrants and should focus on benefits that apply after the auction (such as tax incentives) rather than before it (such as set-asides).

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